Who Will Bear the Brunt of a NAFTA Renegotiation?

by Varnum LLP

Originally published by Michigan Farm News on February 9, 2017; republished with permission.

President Trump's plans to renegotiate the North American Free Trade Agreement (NAFTA) give rise to a number of questions about the future of trade between the United States, Mexico and Canada. 

While such a move might benefit the U.S. manufacturing sector by curbing foreign competition, the possibility of a simultaneous negative effect on the agricultural sector has led to some concern among industry leaders.

On Jan. 23, a long list of stakeholders in the agricultural sector, including Cargill, Tyson Foods and the National Grain and Feed Association, among over 100 others, wrote a letter to President Trump expressing their concern about his potential plans.

"Increased market access under NAFTA," they explained, "has been a windfall for U.S. farmers, ranchers and food processors." The letter also stresses the economic importance and value of U.S. agricultural exports, as well as the role trade agreements such as NAFTA have played in developing the agricultural export market.

Indeed, U.S. food and agriculture exports to Canada and Mexico have more than quadrupled since NAFTA took effect in 1994, rising from $8.9 billion in 1993 to $38.6 billion in 2015. 

Mexico, for example, has become the largest market for U.S. apples and pears, as well as a major destination for U.S. corn. While the pros and cons of NAFTA may be nuanced and debatable, the general consensus appears to be that the agricultural sector has been a net winner in the NAFTA era. 

With this growth hanging in the balance and with President Trump's initial focus seemingly on renegotiations to benefit the manufacturing industry in particular, there is reason for the agricultural sector to be wary.

Perhaps the most obvious foreseeable result of a renegotiation—or of the abandonment of NAFTA altogether—is a trade war involving increasing tariffs on both sides. President Trump has spoken of tariffs as high as 35 percent on certain imports, and the agricultural sector is an obvious choice for retaliatory tariffs from Mexico, Canada and other countries. That path, of course, could take a major toll on the U.S. agriculture industry, a major net exporter of corn, soybeans, wheat and dry beans, among other farm products. 

Even as President Trump has promised to bow out of NAFTA if necessary to protect American interests, Mexican president Enrique Peña Nieto and Economy Minister Ildefonso Guajardo have both indicated a willingness to step away from NAFTA if a renegotiation proves futile for Mexican interests. As Guajardo told the Mexican press, "[t]here could be no other option. Go for something that is less than what we already have? It would not make sense to stay." Mexico has since taken its first step toward a renegotiation by beginning a 90-day consultation process with its Senate and private sector, so we can only predict how things will play out from here. 

Renegotiating a major trade agreement is "uncharted territory" for the United States, as Michigan State University Agriculture Economist Dr. Dave Schweikhardt explained in a November 2016 video interview by Farm News Media. 

Although the process ahead is unclear, Schweikhardt said he "can almost guarantee what the outcome of that process will be — agriculture will be dragged into this issue." 

The challenge in any such renegotiation of NAFTA is to achieve an outcome that not only benefits the manufacturing sector, but also maintains a positive outcome for agriculture under NAFTA and other trade agreements going forward.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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